The JSE Securities Exchange will be launching an index early next year to measure the social, environmental and economic effect of top SA companies.
The index will contain three pillars to represent the triple bottom line, set in a "foundation" of solid corporate governance. Participating corporations will be expected to meet detailed selection criteria in all four categories.
The criteria for inclusion in the Socially Responsible Investment (SRI) index, first proposed a year ago, were published in mid-October and have been structured to reflect SA realities.
"It is most important with an index like this to try to build consensus on the criteria," says Nicky Newton-King, JSE deputy CEO and a prime mover behind the SRI index. "We have tried hard to get as many people as possible, and from diverse backgrounds, to buy into what we're achieving. We want a crucible of consensus."
The JSE's SRI index lists more than a dozen documents that inform it, from the King Report on Corporate Governance 2002 (King 2) and the New Partnership for Africa's Development to the Universal Declaration of Human Rights, the AccountAbility 1000 series for social and ethical accountability and the ISO 14000 international standards on environmental management.
The JSE created an advisory committee and assembled a control group of companies earlier this year to test the draft index criteria. The control group process provided valuable insight into what was achievable and what was not, says Newton-King. The criteria were updated according to the group's comments as well as those of others who contacted the JSE after the draft appeared on the exchange's website or whom the JSE approached for their views.
The resultant criteria are different from the first draft criteria, which suggested that one could look to define a category of "high-impact companies" in relation to both social and environmental criteria. This distinction was dropped for the final version where all companies will be assessed against the same social criteria but different standards are set for companies according to their environmental impact. The original draft also invites comments on the tendency of other indices to exclude or downweight businesses that operate in controversial areas. The final version is inclusive, which makes it different from the FTSE4Good index.
"We have decided to construct an SRI index and not an ethical index, so we don't apply an ethical screen and don't exclude companies in certain lines of business," says Newton-King. Some ethical indices, for instance, exclude tobacco companies, but "why would one exclude tobacco and not alcohol, and if you do exclude tobacco, why is it worse than gambling?
"If you exclude companies that mine uranium because uranium has a long half-life, where does that lead you in deciding how to treat a company in a country whose only way to generate power in the future may be nuclear? There isn't a simple answer."
What the JSE has done in the SRI index is to categorise industries in the environmental section of the index as high impact, medium impact and low impact, and set different standards for each. The environmental policy of companies categorised as high impact must cover the group's entire activities in SA, whereas the policy of those whose impact is medium needs to cover only "that part of the group/company with the most significant environmental impacts in SA". In low-impact industries, companies must merely "have published or have clear plans to publish a commitment or policy statement".
High-impact industries include many big SA businesses - from aerospace and defence to automobiles, forestry, mining, oil and gas, steel and other metals, tobacco, and much more. The list of medium-impact companies is about half the length, and contains such industries as health, IT, media, real estate and telecoms. Low-impact firms include banks, investment companies, life assurance and similar strictly financial operations.
Companies must meet minimum criteria in each of the three pillars for participation in the index, and then they will receive rankings. "A company must address each of these pillars if it is to be considered to have integrated sustainability into its business practices," Newton-King writes in a covering letter to companies invited to participate.
An outline of environmental sustainability notes that "Africa has a rich and critical resource base, which needs to be wisely used if it is to provide any sustainable support to the development of SA and its people".
For the economic sustainability pillar, the JSE writes that though financial performance is an aspect of economic sustainability, it is not necessarily a reflection of long-term growth. "Companies need to be able to adapt to macroeconomic driving forces through balancing the use of resources against short-term profits and should further be focused on working towards long-term growth and sustainability through measuring their economic impacts in their sphere of influence."
The social sustainability pillar requires companies to move beyond engaging with only shareholders and maintain relationships with a wide range of stakeholders, including staff and the community. "Companies need to demonstrate core business strategies that are linked to internal management systems and key performance indicators aimed at promoting the social upliftment, development and poverty reduction of its staff and the communities in which it operates. Emphasis also needs to be placed on diversity, employment equity, black economic empowerment, fair labour practices, employee health and safety, development of human capital and managing the effect of the HIV/Aids pandemic on the company's activities."
As for corporate governance, the foundation, its fundamental concepts are fairness, accountability, responsibility and transparency. "Companies should display good corporate governance standards in all their activities, in principle and practice. The key challenge is to achieve a balance between performance and compliance, while taking account of stakeholder expectations." It seems a tough order, and though some of the principles and practices on which companies are rated are negotiable, there are core indicators that are not.
All the same, the JSE does not expect instant utopia, and there are signs among the indicators of the index's incremental nature. A core indicator in the category "management and performance" under corporate governance, for example, is that performance be "in line with 60% or more of the elements of King 2 in relation to the board, subcommittees, separation of functions or [that there be] clear plans to phase these in over two years." Companies are not required to make maximum scores in relation to each criteria: sufficient action towards meeting criteria could also enable a company to amass the necessary scores to qualify for the index.
In a covering letter to companies invited to participate - the top 160 companies in the JSE - Newton-King notes that the criteria have "a developmental point of departure that recognises the nascent nature of this aspect of business practice" and mentions the exchange's intention to "encourage companies to progress, disclose, implement and report on their triple bottom line strategies and programmes. We expect that the criteria will evolve over time."
Why has the JSE developed a sustainability index?
"It's our contribution to the debate about socially responsible practices," she says. "We're the first exchange to sponsor an index of this nature. We can do it because, though we're a small exchange, we have traditionally played a big role in developing corporate guidelines such as those on corporate governance. And SA business is engaged with their stakeholders and the issues of sustainability in a far greater way than overseas. They need to be celebrated for this. There are a number of SA companies on the Dow Jones index, and they get quite a lot of kudos for being there.
"We hope the criteria will become an aspirational benchmark for all of us. My proposition to the companies is that they are already doing a lot in this area. This will become a seal of quality." The fortunes of the companies that meet the criteria will be tracked electronically to see how well they perform relative to other companies.
"The key issue that differentiates our index from any other is the SA focus of the criteria," she says. "So it is key in our index that you should have a black economic empowerment focus and that you should have HIV/Aids policies and practices. You wouldn't find these mentioned in other international indices, but for an SA company, these are big issues.
"This is a Proudly South African index. It's something that will show what SA companies are doing in this area. It's an opportunity to praise them for what they do as opposed to criticising them for what they are not doing."
